As we head into the final stretch of 2015, a majority of firms in the commercial construction industry are doing better than they were earlier in the year based on the results of our 3rd Quarter Construction Data Index (CDI) survey. Respondents to our CDI survey also indicated that a large majority (92%) expect to be doing about the same or better over the next six months. Our survey results forecasts a strong finish to 2015 for the construction industry and a solid start to the New Year. Demand for commercial construction remains strong with solid growth in 2015 and predictions for further growth in 2016.
Job growth in the construction industry was sluggish in 3rd Quarter 2015. The construction industry only added 18,000 jobs during July (5,000), August (5,000) and September (8,000) according to the Bureau of Labor Statistics. This is less than half of the 45,000 jobs added in the 2nd Quarter. In 3rd Quarter 2014, 70,000 jobs were added in construction, about 4 times what was added during the same time period this year. Total construction employment currently stands at 6,396,000 jobs. During the first nine months of 2015, 121,000 jobs have been added in construction. By comparison during the first nine months of 2014, 254,000 jobs had been added, more than double this year’s total. Over the past 12 months the construction industry has added 205,000 jobs.
Despite the slow job growth, construction spending has been steadily increasing every month this year. The seasonally adjusted annual rate of construction spending was $1,079.1 billion in July and increased in August to $1,086.2 billion. August’s estimate is the highest it’s been since May 2008. According to the U.S. Census Bureau, total construction spending from January through August 2015 was $683.4 billion. If we average that amount out for the first eight months and factor the average in for the remaining four months of 2015, we get a rough estimate of total construction spending for the year at $1,025.1 billion which would be about a 6.5% increase over 2014.
When asked how their business is doing now, relative to six months ago 59% of respondents indicated business was better. Of the remaining responses, 29% stated business is about the same and only 12% stated things had gotten worse over the past six months. This is the highest percentage of firms indicating things are better than the previous six months in any of our 3rd Quarter CDI surveys.
When asked to look forward to the next six months, 62% of firms indicated they felt their business would be doing better than their current situation. Only 8% of firms indicated that they felt their business would be doing worse in six months’ time and 30% stated they thought their business would be doing about the same.
These results are fairly close in line with past results for 3rd Quarter. We survey a large number of firms of all sizes working in commercial construction including general contractors, specialty trade contractors and suppliers. Some of these firms work year-round while others are focused more on seasonal work. Our 3rd Quarter responses appear to reflect an optimistic, yet guarded outlook for the future. Last winter was pretty brutal in the Northeast with record snowfalls in areas that obviously impacted construction productivity in that region.
Here’s a look at some of the other leading economic indicators for the commercial construction industry.
FMI’s Nonresidential Construction Index Report for 3rd Quarter 2015 was at 63.6, down 1.3 points from the 2nd Quarter score of 64.9. The score is 1.1 points up from the 3rd Quarter score of 62.5. Despite the decrease from the previous quarter, this is still a positive sign as any score above 50 indicates expansion, while any score below 50 indicates contraction.
FMI’s 3rd Quarter 2015 Construction Outlook saw a slight upgrade from the previous quarter. They are now forecasting a 6% growth for construction spending over the 5% predicted in the 2nd Quarter. That would put construction put-in-place to be at $1,019.8 billion for 2015. This isn’t far off from estimate we came up with of $1,025.1 billion in construction spending in 2015, which would be an increase of about 6.5% over 2014. FMI’s 3rd Quarter 2015 Construction Outlook is forecasting 7% growth in 2016 which would bring construction spending to $1.09 trillion.
The American Institute of Architects’ (AIA) Architecture Billings Index (ABI) score dropped to a score of 49.1 in August, indicating a small decrease in design services. This shouldn’t be huge cause for concern as the scores for the previous two months were strong, 55.7 in June and 54.7 in July. The new project inquiries index was at 61.8 for August and the design contracts index increased from 54.5 in July to 55.3 in August. The ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending and any score above 50 indicates an increase in billings and any score below 50 indicates a decrease in billings.
The Turner Building Cost Index, which measures nonresidential building costs, was at 949 for 3rd Quarter 2015, 1.17% above the 938 recorded for 2nd Quarter 2015. This is an increase of 4.5% from the 3rd Quarter 2014 score of 908. According to the report, there was a reduction in the cost of fuel and manufactured components which was “offset by a continued increase in construction activity which drove an overall increase of costs in the 3rd Quarter.”
In our last CDI which was released in July we talked about how the current short-term transportation funding stopgap was set to expire at the end of the month. We floated the idea that a long-term six-year transportation bill was possible as support had been growing. That record must be on repeat, because we are facing the same scenario in October. There’s a larger possibility that might actually come to fruition this time around. The Senate passed a long-term bill over the summer that the House has sat on. The main difference this time around is the fact that House Speaker John Boehner (R-Ohio) is stepping down as Speaker at the end of the month and has stated that he’d like to leave a clean slate for his successor. A long-term fix would finally give states the confidence to start work on some of their larger multi-year infrastructure projects that they’ve been putting off due to uncertainty on whether funding would be available.
There has also been reports of fabrication delays in construction materials and building supplies, most noticeably with the reports of a float glass shortage. While there does appear to be an increase in material costs due to increased activity and higher demand, there doesn’t appear to be any actual shortages in availability, just an extension of delivery lead times for some products.
The much more pressing issue facing the construction industry is the worker shortage. Last month the Associated General Contractors of America (AGC) released a report indicating 86% of construction firms are having difficulty filling hourly and salaried positions. The main problem being that the construction industry shed over 2.2 million jobs during the recession. That was around 29% of the workforce which wasn’t all that bad when you consider yearly construction spending dropped 31.6% from 2007 to 2011. The problem is that construction spending has been increasing each year since 2011 and while job growth has increased, it hasn’t been matching the rate of construction spending. Of the more than 2.2 million jobs lost only 964,000 have been added back.
In August 2015 the seasonally adjusted annual rate of construction spending was $1,086.2 and construction employment was at 6.388 million jobs. The closest comparison to that amount was in May 2008 when the rate was $1,091.6 billion there were 7.274 million construction workers. That’s a difference of 886,000 workers. When the recession hit a lot of workers were laid off and they either retired or sought employment in another industry. As construction activity has continued to grow over the past four years the industry has overall done a poor job of enticing workers to the construction field. There are new reports coming out every week of how companies are scrambling to find workers to avoid project delays. The good news for workers is that these companies are willing to pay higher wages to skilled and experienced workers. If job growth in construction has leveled off, unemployment in the industry was at 5.5% in July, 6.1% in August and 5.5% in September, it could spell trouble down the road especially if demand continues at its current pace.
About the CDI
The Construction Data Index (CDI) is a user-based forward-looking survey of the commercial construction industry. The index is a forecast tool that predicts future outlook for general contractors, subcontractors, and building material suppliers.
The CDI is designed to help firms answer one simple question: According to industry professionals like myself, are things getting better or worse? In order to obtain the data for this index, Construction Data surveys professionals working in the commercial construction industry on a monthly basis. The survey asks two questions:
How is your business doing, relative to six months ago?
How do you see your business doing six months from now?
Results are measured on a five point Likert scale: with 5 – much better, 4 – a little better, 3 – the same, 2 – a little worse and 1 – worse.
If you would like to participate in future CDI surveys, please email us at firstname.lastname@example.org.